An entrepreneur prior to setting up his business must do a lot of research and planning. One such important aspect is conducting industry analysis. This helps him analyse the scope for his product or service, the level of competition and other such crucial factors. Let us study Porter’s Five Forces which is a useful tool to evaluate the industry and its five important factors.
Porter’s Five Forces to Industry Analysis
Before entering a new market or industry, the entrepreneur must be very well versed with the business environment and functioning of this industry.
So the study of this environment and analysis of the industry are essential for his successful entry into the market. And one important and effective tool for this is Porters Approach to Industry Analysis, also known as Porter’s Five Forces.
This model helps in identifies and then helps in analyzing the main five competitive forces prevailing in every industry. It also helps in discovering the strengths and weaknesses of an industry.
So the entrepreneur can use this to his advantage while establishing himself in this new market. These factors can be used to his advantage to ensure that they do not affect his profitability. Let us look at the five forces as per the Porters Approach to Industry Analysis.
1] Supplier Power
This refers to the power the suppliers have to jack up their prices. This will depend on a litany of factors like – how many suppliers are present in the market, are the goods/services they supply unique and special, is the quality comparable to other suppliers etc.
The fewer the number of suppliers the more the concentration of power in their hands. Another factor will be how difficult it would be for the entrepreneur to shift to alternative suppliers and how much would it cost him? The sum total of all these factors will give us an idea of the supplier power in the industry.
2] Buyer Power
This is an examination of how easily the buyers can bring down the prices of the product and services available in the market.
Again, this will depend on a lot of factors – the number of buyers, the general order size, demand for new products, the uniqueness of your product, prices of other alternatives etc. If the buyers are in limited numbers they can dictate their terms and prices more efficiently.
3] Competitive Rivalry
This is an important factor in Porter’s approach. The number of competitors and their capability are both significant factors in an industry.
So if a new product on the market already has many competitors it is a disadvantage. Because both suppliers and customers have alternatives. But if your product or service has no, or very little competition then that is a significant advantage to the entrepreneur.
4] Threat of Substitution
This refers to the customer finding an alternative way to fulfil their requirements. So they are able to eliminate the need for your product or service because they found another way to satisfy their needs.
Say for example your offer IT services of setting up a LAN connection. But now the customers connect their entire computing system over a wireless network, and so your services are no longer necessary.
5] Threat of New Entry
This refers to how easy it is for new players to enter the market. If it is fairly easy to enter the market with minimum finances and efforts, then new players will keep entering and increasing the competition.
This will weaken your position in the market and dilute your market share. However, if there are some strong barriers to entry it will be favourable to the entrepreneurs.
Solved Question for You
Q: Porters Approach to Industry Analysis was created by ______ to study the attractiveness of an industry.
- Henri Porter
- Henri Fayol
- Michael Porter
- Michael Hudson
Ans: The correct answer is option C. Michael Porter, who was a professor at Harvard Business School, came up with this tool in 1979.